Silver Eclipses Gold in 2011

During the morning of January 4th 2011, as traders in London returned to their desks after the Christmas and New Year celebrations, Gold fixed at $1405.50, £898.77 and €1,048.88 during the morning session. Four months later Gold this morning has fixed at $1507.00, a gain of $101.50 or 6.7% in dollar terms. So Gold in 2011 is off to a great start then? Well, Yes and No. Because while Gold appreciated handsomely in USD terms the picture for GBP and Euro gold is somewhat less impressive. Gold in Britsh Pounds has appreciated just £10.23 and in Euro terms it has registered a fall of €20.88 or 1.9%.

Silver paints a different picture. January 4th 2011 saw Silver fix at $30.67, £19.63 and €22.92 during the afternoon session. Yesterday Silver fixed at $46.26, £27.94 and €31.65 representing $15.59 or 50.8% in dollars, £7.86 or 42.3% in pounds and €8.73 or 38% in Euros. Silver in contrast to Gold has shown appreciation in all currencies not just the dollar, though the dollar appreciation shows a significant lead.

The prices of both these metals illustrate all too clearly a falling US dollar. The FX markets have been described for a while now as a beauty contest among ugly contestants, but what is perhaps most surprising is that the Euro has not suffered more through the sovereign debt crises of some of its members. Though one must remember amongst all this that one wishes to invest in a major world currency, there are not that many to choose from.

I have suggested before in other articles that US debt crisis was and is still, the biggest Elephant in the room, and has not yet really come into focus as the European problems have. It may be that the dollar depreciation to date is a forewarning of this issue coming to a head. The downgrading of the United States AAA debt rating outlook to negative, in many market watchers eyes, far too late, may be the first indication that attention is shifting towards this particular Elephant.

US debt, by any measure, is truly staggering and some think that the amount can never be repaid. The prospects of the US economy growing its way out all that debt certainly seem remote. If at some point the authorities decide the only way to remedy the situation is to inflate their way out, the prospects for the US dollar seem grim, and Silver and Gold over the long term could be very bullish indeed.

Silvers rise is nothing short of incredible. To some investors, that might feel exactly that... Not credible. That is because in the short term, it most probably isn't. There is undoubtedly a high level of speculation in the Silver market right now, especially in Silver, which has recently stolen much of the limelight, not to mention investment inflows, from Gold. However this is not the first time we have been here with precious metals over the past decade or so, and at times like this it is worth remembering what brought us here, and examining what has changed in the overall picture that might reverse the trends we have seen so far.

So if you think that the European Debt Crisis, MENA Unrest and Geo-political Worries, Inflationary Outlook, The Global Derivatives Bubble and biggest of all US debt problems are all going away then sell your precious metals now,